by Giovanni Patti and Peter Robau

The U.S. Securities and Exchange Commission settles the overwhelming majority of its enforcement actions, most with consent decrees where the defendant “neither admits nor denies” wrongdoing.^[1] The SEC has publicly defended its use of “neither admit nor deny” settlements, arguing they: (1) reduce the time and resources required to litigate a case, (2) expedite recovery for defrauded investors, and (3) protect defrauded investors by reducing the risk that the SEC will lose at trial.^[2] As John Coffee recently noted, “[e]very few years, the issue is certain to be raised: Why does the SEC persist in ‘neither admit nor deny’ settlements, which allow an issuer to avoid acknowledging any misconduct?”^[3]

“Neither Admit nor Deny” after the Citigroup Case

Since implementation in the early 1970s,^[4] the SEC’s neither admit nor deny policy faced little challenge until 2011, when Judge Rakoff rebuked the practice in SEC v. Citigroup Global Markets, Inc.^[5] In an order rejecting the SEC’s settlement, Judge Rakoff contended: “as a matter of law, an allegation that is neither admitted nor denied is simply that, an allegation. It has no evidentiary value and no collateral estoppel effect.”^[6] Judge Rakoff believed “it was bad policy, which disserved the public interest, for the SEC to allow Citigroup to settle on terms that did not establish its liability.”^[7] While Judge Rakoff ultimately approved the “neither admit nor deny” consent decree in question after the Second Circuit vacated the district court’s decision, the practice has increasingly come under judicial and academic scrutiny since. 

Following criticism in the wake of the Citigroup decision, SEC Chair Mary Jo White signaled that the SEC would push for more admissions of guilt to bolster enforcement accountability. In a June 2013 internal memorandum, Chair White recommended that SEC attorneys seek more admissions of guilt “in certain cases where heightened accountability or acceptance of responsibility through the defendants’ admission of misconduct may be appropriate, even if it does not allow [the SEC] to achieve a prompt resolution.”^[8] Chair White’s focus on pushing for more accountability – and admissions of guilt – has been documented by empirical research. Verity Winship and Jennifer K. Robbennolt showed that the number of admissions of guilt increased between the years 2013 and 2017.^[9]

While admissions of guilt increased under Chair White, as a percentage of overall enforcement action they still remained relatively low and the SEC’s policy shift has been criticized for not being sufficiently transformative.^[10] Furthermore, the SEC’s use of “neither admit nor deny” settlements continues to be controversial. In 2018, the New Civil Liberties Alliance filed a rulemaking petition challenging the SEC’s use of such settlements.^[11] And in 2019, the CATO Institute filed a complaint arguing that the SEC’s so-called “gag rule”, which prohibits defendants from disclosing the details about “neither admit nor deny” settlements, is unconstitutional and violates defendants’ first Amendment rights (the case was dismissed for lack of standing).^[12]

“Neither Admit Nor Deny” Settlements Under SEC Chair Jay Clayton

Chair White’s successor, President Trump’s appointed SEC Chair Jay Clayton, has only obliquely addressed the SEC’s “neither admit nor deny” policy publicly. During his confirmation hearings, Clayton was asked whether he might continue Chair White’s policy of seeking more admissions of guilt, and Clayton responded by acknowledging the deterrent effects of seeking admissions of guilt, but also “recognize[d] the SEC’s interest in, where appropriate, avoiding drawn-out proceedings that strain the resources of the Enforcement Division staff and lengthen the time it would take for resolution, including for investors to receive restitution.”^[13] However, in 2017, the SEC’s co-directors of the Division of Enforcement, Steven Peikin and Stephanie Avakian, suggested that the SEC under Clayton might pull back on the agency’s policy of pushing for admissions of guilt.^[14]

Using data from the Securities Enforcement Empirical Database (SEED), a collaboration between the NYU Pollack Center for Law & Business and Cornerstone Research, we examined the prevalence of “neither admit nor deny” settlements, as well as admissions of guilt, in SEC actions against public companies and their subsidiaries in actions instituted between FY 2010 and FY 2020.^[15] “Other” results include (1) settled actions where the defendant’s responsibility was not specifically addressed in any documents relating to the actions, (2) actions where the SEC referenced a parallel proceeding (e.g., a parallel criminal action), but did not indicate whether the defendant/respondent admitted guilt, (3) actions that were still ongoing as of December 1, 2020, and/or (4) litigated actions where the SEC prevailed, including actions where the SEC prevailed as a result of a default judgment issued against the defendant. Resolutions were sorted on a case-level basis (for example, an action where one or more defendants admitted guilt was counted as one admission of guilt), and the date of each action was keyed to the date the action was initiated. Six actions in our data-set were classified as two categories, and thus were counted twice.

Given the low numbers of admissions of guilt overall, it is difficult to ascertain clear trends. As shown below in Figure 1, there do not appear to be any major changes in admissions of guilt to the SEC – as an absolute number or relative percentage of actions – under Chair Clayton. If anything, when comparing the mean from FY 2014 – FY 2017 to FY 2018 – FY 2020, there was a slight decrease.

Figure 1

See color accessible chart

Figure 2

See color accessible chart

A closer look at how admissions of guilt arise paints a more complicated picture of the current SEC’s admissions policy, because not all “admissions of guilt” to the SEC arise equally. That is, in certain cases, the SEC incorporates a defendant’s admission of guilt to a different prosecutor in a parallel action (for example, a parallel criminal case, or parallel federal civil prosecution, sometimes in connection with a deferred or non-prosecution agreement). We tracked this distinction and our data, set forth below, indicates that admissions of guilt specifically to the SEC peaked under Chair White, and increasingly the SEC has incorporated admissions of guilt in separate, parallel actions. For example, there were five admissions of guilt in 2020 (as depicted in Figure 1).  Of the five, two occurred in the SEC action and three arose in parallel actions and not in the SEC action. A note on parallel admissions of guilt – all but one of the admissions of guilt in separate, parallel actions involved Foreign Corrupt Practices Act violations.

Figure 3

See color accessible chart

Based on SEED enforcement data, it appears that the SEC has indeed, albeit slowly, shifted away from the more aggressive prosecutorial stance instituted under Chair White, as signaled by Peikin and Avakian.

Footnotes

^[1] Priyah Kaul, Admit or Deny: A Call for Reform of the SEC’s ‘Neither-Admit-Nor-Deny’ Policy, 48 U. Mich. J. L. Reform 535, 536 (2015), at: https://repository.law.umich.edu/mjlr/vol48/iss2/6/

^[2] Robert Khuzami, Former Director, Div. of Enforcement, Sec. Exch. Comm’n., Remarks Before the Consumer Federation of America’s Financial Services Conference (Dec. 1, 2011), available at http://www.sec.gov/news/speech/2011/spch120111rk.htm

[3] “Biden and the SEC: Some Possible Agendas,” CLS Blue Sky Blog, https://clsbluesky.law.columbia.edu/2020/12/02/biden-and-the-sec-some-possible-agendas/ (last visited Dec 7, 2020).

^[4] See Consent Decrees in Judicial or Administrative Proceedings, Securities Act Rel. No. 33–5337 (Nov. 28, 1972).

^[5] See SEC v. Citigroup Global Markets Inc., 827 F. Supp. 2d 328, 333 (S.D.N.Y. 2011), vacated and remanded, 752 F.3d 285 (2d Cir. 2014).

^[6] Id. at 334.

^[7] SEC v. Citigroup Global Mkts. Inc., 673 F.3d 158, 163 (2d Cir. 2012).

^[8] SEC Chair Mary Jo White Announces Potentially Significant Change to SEC’s Settlement Policy, Davis Wright Tremaine, at: https://www.dwt.com/insights/2013/07/sec-chair-mary-jo-white-announces-potentially-sign.

^[9] Verity Winship & Jennifer K. Robbennolt, An Empirical Study of Admissions in SEC Settlements, 60 Ariz. L. Rev. 1 (2018) (but finding that while absolute numbers increased, “admissions, however, varied widely in their scope”). See also David Rosenfeld, Admissions in SEC Enforcement Cases: The Revolution That Wasn’t, 103 Iowa L. Rev. 113 (2017).

^[10] Id.

^[11] In re SEC Rule Imposing Speech Restraints in Consent Orders, https://www.sec.gov/rules/petitions/2018/petn4-733.pdf (PDF: 462 KB) 

^[12] Cato Institute v. SEC, et al., Case 1:19-cv-00047 (D.D.C. Jan. 9, 2019).

^[13] Hearing Before the Committee on Banking, Housing and Urban Affairs on the Nomination of Jay Clayton, 115th Cong. S. Hrg. 115-9 (Mar. 23, 2017)

^[14] Dave Michaels, SEC Signals Pullback From Prosecutorial Approach to Enforcement, Wall Street Journal (Oct. 26, 2017), available at: https://www.wsj.com/articles/sec-signals-pullback-from-prosecutorial-approach-to-enforcement-1509055200

^[15] The sample includes data from SEED from October 1, 2009 through September 30, 2020, consistent with the SEC’s fiscal calendar current through the date of this publishing. The sample tracks actions initiated against defendants that are public companies and/or their subsidiaries (as well as individual defendants that are charged in the same action as a public company or subsidiary). Public companies are defined as those that traded on a major U.S. exchange as identified by the Center for Research in Security Prices (CRSP) at the time the enforcement action was initiated, or otherwise within the five-year period preceding the initiation. Thus, public companies that traded over-the-counter or only on major non-U.S. exchanges were excluded, as were companies that did not become public until after the enforcement action was initiated. Subsidiaries are those entities that had a publicly traded parent company at the time the enforcement action was initiated, or otherwise within the five-year period preceding the initiation. Actions solely against natural person defendants were excluded from the sample. See NYU Pollack Center for Law & Business and Cornerstone Research, SEC Enforcement Activity: Public Companies and Subsidiaries – Fiscal Year 2020 Update (Nov. 18, 2020), available at https://www.cornerstone.com/Publications/Reports/SEC-Enforcement-Activity-FY-2020-Update.pdf (PDF: 1,051 KB). For more information on the SEED methodology, see https://www.law.nyu.edu/centers/pollackcenterlawbusiness/seed

Giovanni Patti is the Head of Research for the Securities Enforcement Empirical Database (SEED) at the NYU Pollack Center for Law & Business. Peter Robau is the Wagner Fellow at the NYU Pollack Center for Law & Business.

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